Can I please get some help with this question ? Step by step so I can understand
ID: 2763607 • Letter: C
Question
Can I please get some help with this question ? Step by step so I can understand better.
Consider the following pair of mortgage loan options for a $150, 000 mortgage. Which mortgage loan has the larger total cost (closing costs + the amount paid for points + total cost of interest)? By how much? Mortgage A: 30 -year fixed at 9.25 % with closing costs of $1400 and 1 point. Mortgage B: 30 -year fixed at 8.25 % with closing costs of $1400 and 3 points. Choose the correct answer below, and fill in the answer box to complete your choice.
A. Mortgage A has a larger total cost than mortgage B by $ .
B. Mortgage B has a larger total cost than mortgage A by $ . (Round to the nearest dollar as needed.)
Thank you!
Explanation / Answer
Mortgage A
Mortgage amount = $150,000
Interest Rate= 9.25%
Closing Costs, CC= $1400
Points (P) = 1 point which is equivalent to 1% of the mortgage amount = $1500
Total cost of the mortgage is the sum of closing costs (CC), amount paid for points (P) and total cost of interest (IC)
TC=CC+P+IC
The interest cost is calculated as shown below
The monthly payment on the loan = $1234.01 (Calculated using the MS Excel function of PMT)
The total payment made towards loan = 1234.01 x 360 (number of payments made) = $444,243
Total interest paid, IC= Total Payment made-Principal = 444,243-150,000 = $294,243
TC=1400+1500+294243 = $297,143
Mortgage B
Mortgage amount = $150,000
Interest Rate= 8.25%
Closing Costs, CC= $1400
Points (P) = 3 point which is equivalent to 1% of the mortgage amount = $4500
Total cost of the mortgage is the sum of closing costs (CC), amount paid for points (P) and total cost of interest (IC)
TC=1400+4500+IC
The interest cost is calculated as shown below
The monthly payment on the loan = $1127 (Calculated using the MS Excel function of PMT)
The total payment made towards loan = 1127x 360 (number of payments made) = $405,720
Total interest paid, IC= Total Payment made-Principal = 405,720-150,000 = $255720
TC=1400+4500+255720 = $261620
The total cost of Mortgage B is lower than Mortgage A by $41,423 alternatively Mortgage A has higher cost than Mortgage B by $41,423
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